Activism and Takeovers: Friends or Competitors?

Shareholder activism and corporate takeovers are usually presented as two different ways of dealing with the same corporate governance problem. When managers fail to maximise firm value, an activist can intervene and demand change or an acquirer can take control and replace the management team.

This familiar account raises a deceptively simple question. If activists discipline managers and improve companies from within, do they reduce the need for takeovers? Or, because activists often pressure boards to engage with potential buyers, do they instead make takeovers more likely?

In our paper, Shareholder Activism, Takeovers, and Managerial Discipline⁠, we find that both ideas are correct. Activism complements the takeover market by helping some acquisitions take place. At the same time, it substitutes for takeovers by improving managerial incentives and making some acquisitions unnecessary. Once these competing forces are considered together, activism has almost no effect on the total volume of takeovers.

That may sound like a neutral result. It is not. Activists substantially change which takeovers occur, how the surplus from those deals is divided, and how managers behave even when no activist campaign is launched.

Activists help deals happen—but at a price

Activists can make acquisitions easier by reducing the agency frictions that arise when the interests of managers, directors and shareholders diverge. A board may resist an attractive offer because directors value their positions, because management opposes the transaction, or because insiders otherwise bear private costs when control changes hands. An activist can represent shareholders more credibly during negotiations and increase the pressure on a reluctant board to engage with a bidder.

Our estimates indicate that an activist campaign increases the probability of a takeover by 7.7%. Among the takeovers completed during activist campaigns, approximately 7% are marginal to the activist’s intervention: without the activist, those deals would not have happened.

This is a meaningful contribution to the market for corporate control. Activists are not merely identifying firms that are already likely to be acquired. They help overcome the frictions preventing some value-creating transactions from being completed.

But facilitating a takeover is a double-edged sword for target shareholders. The same resistance that can block a transaction may also strengthen the board’s bargaining position. Once an activist reduces that resistance, the acquisition becomes more likely—but the bidder can secure the target at a lower price. We estimate that bid premia are 13.7% lower when an activist is involved in the negotiations.

For the relatively small group of deals that would not otherwise occur, activist intervention creates substantial value for target shareholders. Across all campaigns, however, the benefits from completing additional takeovers are largely offset by the lower prices received in deals that would have occurred anyway. Much of the value generated by takeover facilitation therefore accrues to acquirers rather than target shareholders.

Better governance can make takeovers unnecessary

Activists also affect firms through a less visible—and ultimately more important—channel.

When an activist is present, it becomes easier for the board to replace an underperforming CEO. The increased credibility of that threat gives managers a stronger incentive to exert effort, undertake valuable projects and improve operating performance. We estimate that an activist campaign increases the probability of managerial effort by more than 30%, raising productivity and shareholder value.

This improvement also changes the economics of a potential acquisition. A better-managed and more productive company is worth more as an independent firm. That reduces the surplus available from transferring control to an acquirer. Some takeovers that would have been worthwhile when the company was poorly managed no longer create enough additional value to occur.

Through this channel, activism crowds out approximately 0.8% of takeover volume. Activist involvement facilitates some deals, but the managerial discipline created by activism eliminates others. The two effects almost entirely offset each other, leaving aggregate takeover activity essentially unchanged.

Focusing only on observed activist campaigns would miss this result. At the campaign level, activism appears to promote takeovers. At the economy-wide level, it simultaneously reduces the need for them.

The most valuable activist may be the one who never appears

The broader disciplinary effect of activism does not require an activist to launch a campaign. Managers and boards respond to the possibility of intervention as well as to intervention itself.

In our model, the presence of activists in the economy raises average shareholder value by 0.33%, primarily through stronger managerial incentives and higher productivity. Strikingly, the value created by the threat of activism is similar in magnitude to the effect of an actual campaign. But while campaigns occur in only around 4% of firm-years, the threat of intervention applies to every potential target.

The economy-wide value of activism is therefore much greater than the value visible in announced campaigns. Activists capture only a small part of the total benefit they generate.

Our results also clarify the role of activist information. Most of the share-price increase around campaign announcements reflects activists’ superior information, especially information about potential takeover opportunities. This does not mean activists are merely good stock-pickers. Their informational advantage helps make intervention financially viable. The activist bears the cost of a campaign, while the resulting gains are shared with all shareholders. Without an information advantage, activists intervene much less often, and shareholders lose the benefits of both actual campaigns and the threat of intervention.

Looking beyond campaign headlines

These findings matter for policy. Rules that raise the cost of activism may prevent interventions that appear disruptive or privately motivated. But they can also weaken managerial discipline across firms that are never targeted. Evaluating activist regulation solely by counting campaigns—or by measuring returns around campaign announcements—therefore provides an incomplete picture.

The usual debate asks whether activists create value by selling companies or by improving them. Our results suggest that this is the wrong distinction. Activists help some valuable takeovers happen, while improving other companies enough that a takeover is no longer needed.

The most important contribution of shareholder activism may not be the campaigns that attract public attention or even the deals activists help complete. It may be the quieter discipline imposed on managers throughout the market—and the takeovers that, because of that discipline, never need to happen.

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Francesco Celentano is an Assistant Professor of Finance at University of Lausanne and Faculty Member at the Swiss Finance Institute. 

Oliver Levine is an Associate Professor of Finance at University of Wisconsin-Madison.

This blog is based on a paper presented at the Tenth Annual Mergers and Acquisitions Research Centre (MARC) Conference, held in London and hosted by Bayes Business School in collaboration with ECGI. Visit the event page to explore more conference-related blogs.

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